Distribution Solutions Group, Inc. Price & Performance (DSGR)

Management will also refer to non GAAP measures, and reconciliations to the nearest GAAP measures can be found at the end of the earnings release. The earnings release issued earlier today was posted on the Investor Relations section of our website. A copy of the release has also been included in a current report on Form eight ks filed with the SEC. Lastly, call is being webcast on the Internet via the Distribution Solutions Group Investor page on the company website. A replay of the teleconference will be available through 03/20/2025. With that, I would now like to turn the call over to Brian King. [indiscernible] Thanks, Stephen, and good morning, everyone. Thank you all for joining us.

We ended the year with reported revenue of $1,800,000,000 up almost 15% primarily driven by highly strategic acquisitions completed over the past twenty four months, DSG's trailing twelve month total revenues including pre acquisition revenues for all periods during 2024, were approximately $1,950,000,000 Adjusted free cash flow defined as adjusted Reg G EBITDA less CapEx less working capital investments including pre acquisition trailing twelve month results, grew to $175,000,000 Ahead of the 2022 strategic merger, we disclosed comparative DSG results for the combined fiscal twenty twenty one pre merger results of adjusted revenue totaling $938,000,000 and adjusted EBITDA of $75,000,000 We included twelve months of financial results for Lawson, Gexpro Services and Test Equity. Comparing fiscal twenty twenty four to the 2021 pre merger results for consolidated DSG, we have doubled DSG's revenues and generated an incremental $100,000,000 of adjusted EBITDA in three fiscal years unlocking some additional earnings leverage while making key strategic acquisitions for continuing to drive the value of our offering to our customers and our equity value for our shareholders. All while keeping leverage ratios flat. Keep in mind, that this expansion was made despite and much of 2023 across our business units, and still in early innings of our internal initiatives to unlock a structurally more profitable and valuable platform from which we can use our accelerating cash flows to drive even more valuable growth well into the future.

Last year was challenging for our entire industry as evidenced by the manufacturing PMI remaining in contraction territory for all but one month during 2024. Following market challenges that started across many of our end markets in 2023. Notwithstanding these macro challenges, we successfully expanded revenue during the year both organically and by closing on five highly strategic acquisitions to selectively broaden our scale, geographic footprint customer base. We added valuable offerings by targeting key capability areas where we strategically wanted more customer engagement and service capability and or product depth to drive our market position and financial return opportunities longer term. But by doing it in an accretive way through leveraging our well defined M and A resources and playbook, as well as our collective resources lens on how our strategic objectives should be prioritized actionable opportunity set we are constantly evaluating. This past year, we acted on priorities through opportunities that allowed us to triple our safety product offering at Lawson by acquiring ESS. Expanded our test and measurement calibration services through the most recent CONRES acquisition balanced out our geographic footprint and expanded dramatically our customer engagements in Canada to leverage our large investment in Lawson and Kent VMI sellers there expanded our product and service offerings for our Kent VMI automotive customers, and expanded the type of customers we were best geared to serve with the S and S acquisition And lastly, address the high priority to drive high growth opportunities Southeast Asia, being presented to Gexpro Services by buying a small geographic presence around in Southeast Asia to address specific customer organic growth opportunities.

As we deployed the resources to develop the relationship with these sellers, accomplished closing and managing these acquisitions, we were also prioritizing recruiting internal and external talent and consultative resources to thoughtfully integrate or not while tackling a litany of key value accelerating internal initiatives some of which are so intense and transformative that they require margin contracting investment On the income statement, similar to the capital outlay, of an acquisition, but where those land on the balance sheet, and will take multiple years to really have the desired impact But at that point, we expect we'll have a compounding effect to profitability and long term position in the marketplace and importantly to us as shareholders will be engines to drive our return on invested capital, to structurally much higher levels. Making acquisitions on the balance sheet and on the income statement require me to process the noisiness it creates to near term earnings, ROIC and EBITDA margins but as we pour analysis and emotions over and over on evaluating these projects and then commit to executing on them, we have tremendous confidence that each has an extremely large net present economic value for us as shareholders as well as a real benefit to our customers and colleagues.

A big thank you to all our teams that we are pushing hard on all these initiatives. While juggling all that they are doing to build the DSG of the future, they still demonstrated strong forward progress across those disciplined sets of critical initiatives in each of our verticals while collaborating with each other debated and allocated capital to buy key engines to drive long term free cash flow all while driving very strong current financial outcomes in a less forgiving backdrop around many of their end markets. Like for many, other ambitious and success driven leaders in the recent industrial marketplace, it was quite the fatiguing year for much of our team. Thank you. Still have much to do but we are pleased with the progress toward our strategic goals and financial targets for 2024. Enjoyed 2024 cash flows from operations of over $100,000,000 Before the Hisco retention payment and acquisition costs. With market conditions improving sequentially across most of our end markets during the second half of twenty twenty four, and early in 2025, particularly within our OEM vertical, we remain confident that DSG is very well positioned for record recent headwinds subside. As Ron will discuss in a moment, we continue to show excellent operational traction on initiatives within each of our operating units for the year that should improve earnings leverage for this year.

Turning to Slide five, I will provide updates on some of our initiatives and outlook across our three business platforms. At Lawson Products, we continue to focus on building a world sales force and it's required a large investment of dollars as well as some commitment to choppiness in our earnings engine as we compressed our sales force during the overhaul of our sales tools and disciplines, and now are back focused on growing the team with like minded additional sales resources are still in the early innings of this transformation, which is changing the seventy three year history of that company. This includes cultivating a strong culture that embraces tools and technology, and providing more attractive incentives mostly aligned around customer connectivity and sales growth for our employees. These initiatives in time will take Lawson to the next level of customer engagement. Growth and profitability We fully implemented our Salesforce CRM last year and plan to go live with our completely rebuilt digital platform in the first quarter of this year. As discussed in investor calls over the last eighteen months, Lawson sales force initiative required EBITDA [indiscernible] for 2024 as we invested in additional capabilities and selling tools, and compensation as well as began the journey to fill well over 100 new territories as well as open territories by prioritizing hiring new sales reps with a refined and improving lens on what capability sets will offer them the greatest success with these new tools and capabilities and putting them in the right markets.

This is vital to our long term growth plans as we position the right people to drive the right book of business with the right technology to produce long term strength and value in the marketplace. From the 2022 announcement, and through the compression needed to rework our tools and territories, we reduced our sales force team from about ten twenty to approximately eight thirty by mid-twenty twenty four, which we've now grown back to approximately nine twenty We saw the increased rep retirement and turnover that took place as we announced the rolling out of a significant set of new tools. A CRM and selling resources to support our field sales reps' efforts to improve customer connectivity, and coverage that initially took place in 2023 in the first half of twenty twenty four subside appreciably over the last five months. We are targeting to build up to 1,000 sales reps by the second half of twenty twenty five and an informed lens of better and more we had defined prior to tackling this very transformative set of initiatives. [indiscernible] But we knew we needed to build a more consistent experience to recruit more to join them and as critically make sure that we enhanced all those Lawson sellers ability to drive a better customer experience.

And for us to create better sales force opportunities for future generation of top selling candidates, we hope to recruit and retain all of which should drive a high return on the significant investment as sales productivity benefits and a larger sales force are in place as 2025 plays out, But we made this investment that we believe has an exceptionally high net present value but required near term pain that we are largely through where we all along were not expecting the real benefits to more likely be fully realized not until 2026 and beyond. Other elements of the investments are we've enhanced our sales reps onboarding by improving recruitment, training and leveraging collaborative technologies between sellers, and continue to build and drive our predictive analytics, tools out to the sales force and our customers to enhance The omni channel platform of tools includes and is centered around a large outside sales team but now includes a nimble and resourceful inside team an expanded set of technical sales specialists, and account service field sales support resources and now a robust digital customer interface and is currently being rolled out that will further support our new and existing customers in whatever manner they prefer to engage.

Additionally, we've invested in expanded customer acquisition and retention teams enhance sales productivity and growth. For Lawson's core acquisitions completed in 2024, we are well underway and in most cases complete with integrating products from emergent safety supply into Lawson's offerings and combining S and S Automotive with the Kent Automotive division. Under our MRO focus for the Canada branch division, we are executing initiatives to integrate Source Atlantic with our Bolt Supply House business across Eastern And Western Canada. Notably, we recently hired Jenke as the Canada Division President. Jared has a proven track record of transformational leadership implementing business strategies and building organizational capabilities through positive winning cultures, Jared joined DSG after fourteen years of progressively larger leadership roles at Applied Industrial Technologies, Most recently, he was Vice President of Distribution responsible for $280,000,000 of revenue by leading the sales and operations teams of 26 distribution As our new Canada division President, Jared's immediate priority is to align leadership teams of Source Atlantic and Bolt to ensure collaboration and success of DSG's growth strategy in Canada. Our Canadian branch division positions us as the leading wholesale distributor of MRR supplies, safety products, fast fasteners and services to the large and diverse Canadian markets.

As we discussed last quarter, we signaled our expectation that this acquisition would compress our overall DSG margin. At the same time, we continue to work to realize Defiance Center are no surprise. We know that Source Atlantic had a 50 basis point impact on DSG's consolidated margin profile in the fourth quarter. We are marching toward margin enhancements to return to double digit margins for the Canada branch business, as we remember when we bought Bolt Supply House and it was below 10% margin business also, We are actively working on ERP integrations for the Canadian branch business and the consolidation of four separate branches will be completed by the Summer. We Have Excellent Employees In Canada. And are excited about some of the additional resources we've recruited to join their team. We are excited about each of Lawson's three acquisitions in 2024 and how they address real strategic objectives and together with Lawson and DSG existing and improved capabilities together we offer them stronger ability to drive enhanced profitability and revenue growth as we go into 2025 and through 2026. [indiscernible] area of particular headwind for Lawson during 2024 was our military business. Military sales were down over 50% placing significant pressure on Lawson's total sales.

Not explained at all by our deliberate compression initiatives, or the weaker CPI, which all thought through it As we've mentioned in previous calls, a change in the military ordering and approval process drove the vast majority of this decline. It was a decline that our customers are telling us did not largely get redirected elsewhere. We do have open orders have been carried over from 2024 and are beginning to be released And until the last six weeks, we were confident there would be an additional tailwind for the first half of 2025 for Lawson, but over the last six weeks, we are more subdued in our expectations about the pace of the military releasing these orders. Government has been half of the drag on Lawson's revenue contraction for 2024. At Gexpro Services, we drove sequentially higher quarterly sales for aerospace and defense, technology and renewables end markets in the fourth quarter as these end markets continue to rebound. These end markets also continued to grow sequentially from Q3 to Q4 and our activity in book to bill continues to be strong in the first quarter. As I look across our end markets at both sales and book to bill, the 11% of current average daily sales volume is the only area where we are seeing more consistent cautionary book to bills and revenue trends.

In the aerospace and defense, technology and renewables verticals, that collectively represent over half of our current daily sales volume, you continue to lead the momentum that Gexpro Services continues to enjoy. During the fourth quarter, we announced the acquisition of Tech Component Resources providing to grow in expanding Southeast Asia market Since that acquisition, our JEXPERO services team has only become more encouraged by the growth available to us in those Southeast Asian markets. And are rapidly hiring talent, locking down relationships with customers, are inquiring about our ability to serve them as we can currently add supporting locations. We are very pleased with the full year EBITDA margin expansion for Jexpro Services 160 basis points and the fourth quarter expansion of three eighty basis points. Which was primarily driven by leveraging our fixed cost structure across growing end markets. Our initiatives and our acquisition from 2022 Distribution significantly to the momentum and margin in Gexpro Services is enjoying. Strategic initiatives not the least of which are our Southeast Asia investment and a focus on were implemented in 2024 to make investments and to recruit additional leadership talent to grow and scale as the leading global supply chain services and c parts provider to OEMs.

We also currently enjoy a strong lens around several additional accretive acquisition objectives we hope to successfully address during 2025. At Test Equity Group, our Test and Measurement business continues to show strong sequential momentum. And across all nine of the vertical slices on the business, after two years of challenging end market backdrops, we are seeing indications through sales, and bookings that all but our small European business appears to have stabilized or are improving. Core Test and Measurement sales chambers and rentals and refurb are experiencing positive growth. Rental utilization rates also grew by double digits in the fourth quarter of twenty twenty End market expansion aligns with improving aerospace and defense, technology, and R and D results, which we believe tracks with our customers' 2025 budget, Hisco continues to face weaker sales in key supplier categories. And while our order volumes remain steady, the average order size has declined over the last two years during this contraction. We've seen some competition in the marketplace around customers distributors and salespeople have predictably competed and shuffled less committed customers, to keep volumes up during weaker backdrops. As we discussed late in 2024, bookings have continued to grow and this momentum continues into 2025.

We expect increased bookings to translate to sales in the production supplies business which includes Sysco. Having reworked our go to market strategy in sales force, bringing both sets of resources together, on our production supply effort, the Test Equity and Hisco teams and separating our technical resources around test and measurement sales and services has led to better accountability in customer coverage models. We are hearing confirmation to support this approach is being well received by customers and vendors alike leading to confirmed market share gains and better channel partnerships. These efforts were disruptive over the last eighteen months, but are now allowing us to better our spending leverage, better sales and technical coverage and have allowed for us to and renewed sales growth [indiscernible] Customers appreciate TestEquity's total value proposition. Which provides a unique set of capabilities created by combining the products and services from each of the platforms we've brought together in this vertical [indiscernible] TeEquip and Hisco as well as the key tuck in acquisitions we've completed in several we are chasing where we can bring in structurally higher margin capabilities to leverage the total network this vertical allows them. Finally, although we've taken out more costs than we identified when underwriting our acquisitions, [indiscernible] continue to look for additional optimization opportunities for the platform and have hired a Vice President of Integration to add additional leadership to Test Equity Group's full integration efforts.

This business intelligence is essential as we make strategic decisions about making significant improvements in our business moving forward, and underwrite the next several tuck ins around how they will inform the total profitability acceleration and stabilization of the revenue in this vertical. At Test Equity, our strategic direction will continue to revolve around expanding wallet share with customers, driving repeatable business on the consumables and services side and optimizing digital selling capabilities to supplement and leverage our technical and field sales talent investment. We believe supply chains have mostly normalized for our key vendors and are encouraged by many of them wanting to expand collaboration with us to expand and grow our relationships Although business remains choppy in some areas still, we believe we are benefiting from our disciplined approach and improved platform across several strategic imperatives, which we tackled over the last two years.

We are optimistic that we will see sales and margins build quickly as end markets return. With that, I'll turn it over to Ron to give a broader review of our financials.

Thank you, Brian, and good morning, everyone. Turning to Slide six, DSG's consolidated revenue for the fourth quarter $480,500,000 This represents an increase of $75,200,000 or 18.6% primarily driven by $61,000,000 from five acquisitions in 2024 along with organic sales growth of 3.5% over the same quarter a year ago.

I will provide average daily sales by operating segment in a few moments. Fourth quarter sales grew sequentially compared to third quarter by 2.7% despite three fewer selling days fueled by a full quarter of Source Atlantic and two small acquisitions completed in the fourth quarter.

For the quarter, we generated adjusted EBITDA of $44,900,000 or 9.3% of sales up 90 bps compared to last year's quarter. Primarily due to margin pressure related to the sales force transition fewer selling days and the impact of Source Atlantic on the Canadian branch for the quarter. Excluding the impact of Source Atlantic in the fourth quarter, net margins were 9.9%, We reported operating income of $20,100,000 for the quarter including $12,600,000 in acquisition related including $12,600,000 in acquisition related intangible amortization expenses in $4,700,000 from acquisition related costs non cash stock compensation, non recurring charges and other one time items. Adjusted operating income improved to 37,300,000.0 or 7.8% of sales compared to $28,000,000 or 6.9% of sales in the prior year ago quarter. During the quarter, we generated cash flow of approximately $46,000,000 as compared to $28,000,000 in the year ago quarter. We reported a GAAP loss per diluted share of $0.55 for the quarter versus a GAAP loss per share $0.35 a year ago. Adjusted earnings per share of $0.42 for the quarter compares favorably to EPS of $0.37 in the third quarter and $0.22 in the year ago quarter. Turning to Slide seven, I plan to discuss Q4 results and will not call out the full year highlights but they are available on the slides for your reference.

Starting with Lawson, Q4 sales were $111,800,000 and average daily sales were up 1.8% on acquired revenue. Organic sales were down 10.9% on a soft December lower rep counts and a decline in military sales. Rep count rebuilding efforts are well underway and Net rep counts increased between Q3 and Q4 and we ended the quarter and year with approximately 900 field sales reps compared to a low point of approximately eight thirty at the end of the second and eight sixty at the end of Q3. As we've communicated on past calls, new outside sales reps require a couple of years to ramp up but we continue to optimize the onboarding and the use of technology to advance the efforts in the short term.

For the quarter, Lawson reported adjusted EBITDA of $11,000,000 or 9.8% of sales down from 11.3% a year ago and 13.1% in Q3. As expected, fewer selling days, slower military business and rep investments compressed our fourth quarter margins 2025 has started strong as we've realized and we're back to double digit EBITDA margins for the month of January. Turning to Slide eight, As mentioned last quarter, we added a new reporting segment, the Canada branch division. Which combines the Bolt Supply House that was previously included in other segment with Source Atlantic as a separate segment. Fourth quarter sales for this new cannabis segment in U. S. Dollars were 59,000,000 including $45,600,000 from the Source Atlantic acquisition that was closed during the third quarter.

Excluding the acquired revenue or from the year ago quarter at Bolt Supply. Key operational initiatives are focused on acquisition Distribution, including pricing disciplines, sales force optimization, brands consolidation and cost management. Q4 adjusted EBITDA for the Canada branch segment in USD was $4,200,000 or 7.2% of sales, Excluding Source Atlantic, Q4 adjusted EBITDA for this segment would have been 14.8% being Bolt Supply as compared to 12.9% in year ago, Although we are in the early stages of integrating Bolt Supply in Source Atlantic, we continue to target double digit EBITDA margins for Source Atlantic driven by expected growth and the realization of planned synergies. Turning to JEXPERO Services on Slide nine. Fourth quarter revenue grew by 27.4% from $93,200,000 a year ago to 118,800,000.0 primarily from organic expansion with a nominal amount of acquired revenue. Total organic sales for the quarter were up $24,900,000 or 26.8% from the year ago quarter and up 1.7% sequentially over Q3.

This growth came primarily from expanding our existing customer relationships and the strengthening of many of their end markets including technology, aerospace and defense, and Renewables. Gexpro Services adjusted EBITDA was $15,800,000 or 13.3% of sales up from 9.5% a year ago and compared to 14.1% in the third quarter. Operating leverage continues to be strong and Gexpro Services continues to cross sell realized acquisition synergies with a growing book to bill as end markets strengthen. Compared to a year ago period. Lastly, I will turn to Test Equity Group on Slide 10. Third quarter sales were $191,300,000 dollars with daily organic sales essentially flat compared to a year ago due to headwinds in the electronics assembly market or our consumables, causing softness in the electronic production supplies end market offset by improvements in our test and measurement Chambers and Rental businesses. TestEquities adjusted EBITDA for the quarter was $14,800,000 or 7.8% of sales up from 6.2% as a percent of sales in the prior year quarter and also up 40 basis points compared to the third quarter. Moving to Slide 11, our balance sheet remains strong We ended the quarter with approximately $473,000,000 in net and $335,000,000 of liquidity which includes $82,000,000 of cash and cash equivalents and approximately $253,000,000 under our existing credit facility.

Debt leverage at the end of Q4 was 3.5 times compared to 3.7 times at the end of Q3.

Our targeted debt leverage remains in the range of three to four times. Net capital expenditures including rental equipment were $3,400,000 for the fourth quarter and $14,400,000 for the full year. We expect our 2025 net CapEx to be in the range of $20,000,000 to $25,000,000 or approximately 1% of our revenues.

We also realized a trailing twelve month cash flow conversion of approximately 100% defined as adjusted EBITDA less working capital investments, less CapEx, resulting in a ROIC of roughly 11% inclusive of our acquisitions. We expect that more mature distribution assets can generate ROIC levels in a range of 20% plus and we remain focused on driving incrementally in that direction as we scale the assets that we currently own. Finally, as part of our capital allocation strategy, we opportunistically repurchased $2,600,000 of stock at an average price of $30.13 during fiscal twenty twenty four. I'll now turn the call back over to Brian.

Thank you, Ron. Moving to Slide 12, we've summarized progress on our 2024 initiatives, which Ron and I discussed in greater detail today. Our management teams with strong collaboration from the LKCM Headwater team continuously work to improve our customer intimacy and value proposition strategic direction objectives also strive to make our specialty distribution platform less complex for our investors to understand. We manage the business embracing the tension [indiscernible] compounding objectives we are committed to. But it all comes back to driving profitability and return metrics higher. And to drive sustained accountability across a diverse set of complementary capabilities in each vertical, and the collaboration and commitment of each leadership team around continuously working to help improve operational performance with a daily focus on driving profitability, and capability enhancements, that ultimately will compound our cash flow engine Our M and A playbook is vital to our long term growth strategy. Profitability enhancement objectives and the real compounding engine we are building. And this framework sets high goals for management's that capital and capability allocation to enhance the compounding engine We and they are measured against our ability to convert that capital and defined opportunity into reality. Our verticals compete for capital.

But also collaborate on how to best maximize shareholder value and we deploy capital by ranking the best and highest returns on initiatives and acquisitions to accomplish those long term goals. All working on this business are enthusiastic, about the reality of opportunity as they are highly aligned with the shareholders and confident we have a clear path to generating a significant long term shareholder value creating engine. We are lapping twenty twenty four organic sales softness and are comparing against easier sales comparisons over the next several quarters. So relative momentum feels good.

But on an absolute basis, we need to get back to our mid-twenty twenty three growth and earnings trajectory which we are confident with the recovery in our end markets, we will be better positioned earn more [indiscernible] The last months have not been without some uncertainty as to how our end markets and our own model should adjust to the new mandates from Washington. We are well positioned to enjoy a renaissance in domestic manufacturing Concerning tariffs, and the new administration's directives, including Doge, we are controlling the areas of our business that we can control and we'll stay alert to necessary changes as things progress in 2025. As the narrative and negotiations around tariffs with a handful of countries threatens to impact a very modest amount of our total direct and indirect procurement we reflect on history where it indicates that we've been able work closely with our customers to offset these potential costs. US PMI numbers this year in 2025 are trending over 50 for the first couple of months, which signals better expansion than we have seen in many quarters. Given this, and potentially lower regulatory and will be spending more as they settle in with the new administration and 2024 pent up demand will continue to create sales momentum for our platform in 2025.

Positive comparisons are demonstrated in Gexpro Services and our Test and Measurement, Chambers and Other Equipment categories for TestEquity. We are seeing some end market improvement in Lawson as well. This is a good start. DSG enjoys a tremendous portfolio of end market diversification, as well as diversification of where in that end market we engage with our customers, we with value added services and products. So we are always preparing for choppiness in the demand environment for certain end markets. We are encouraged and know that other end markets will recover further if global tensions ease as expected This year, In closing, thank you for your interest in DSG. We are fortunate to operate within a large combined addressable market across diverse end markets in the MRO, OEM and industrial technologies areas, that focus on specialty distribution categories include products and services and generate significant cash flow through our collective efforts.

We also have a trusted proven track record of resiliency, through business cycles that benefit from our asset light model and tight working [indiscernible] Our teams leading these businesses and working with me on this business are exceptionally aligned with the shareholders This business is built to generate significant free cash flow that provides us the flexibility to focus on the very best ways to efficiently reinvest in at high expected returns, to drive the compounding engine across this platform for all of us or to more directly explore ways to unlock our return capital to shareholders. I want to thank our over 4,400 dedicated employees who working hard to serve our over 200,000 customers worldwide with excellence dedication and energy. Thank you. I also want to thank our executive team and Board for their ongoing [indiscernible] My dozen or so LKCM headwater team members that are daily challenged by our executive team and me to dive into value unlocking initiatives and confidence in patients of DSG shareholders and my partners for investing alongside of us to grow and scale our DSG business in 2024 and 2025 and for many years to come. With that operator, let's open the line for questions.

Certainly. Your first question for today is from Zach Marriott, with Stephens.

Good morning and thank you for taking my questions. Hey, Zach. Good morning.

Is there any color you can share on quarter to date sales levels across DSG as compared to the end of Q4? Yes, Zach, you're asking about the first quarter, correct?

Yes, sir. [indiscernible] yes, I think I mentioned this in some of my prepared remarks that Lawson has gotten off to a If you exclude the acquisition certainly that came through in 2024, if you back that out of the out of the conversation here for a minute, Up versus, I would say, a year ago, January, February up also versus a year ago. All in on a consolidated basis, I'd say kind of kind of flattish relative to Q4 trends into Q3 the first couple of months of of 2025. Great. Thank you for that. And then also on a sequential basis, how have consolidated margins trended in Q1 versus Q4? And any noteworthy factors in March that may change that? Yes. I would say nothing really noteworthy in March. In February, we're still working through getting everything finalized and so forth. January, again, I would say pretty consistent with with where we were in the fourth quarter from an overall margin perspective. What I would say is that And Brian alluded to this a little bit in his comments as well. As 2025 develops, especially as we continue to work on a lot of the synergies and opportunities within the acquisitions that we made in 2024 our expectation is that the margin profile will lift as 2025 develops.

So So especially on the Source Atlantic acquisition that we've made, and then also certainly with S and S. That we made in 2024 as well. So to still, I would say, pretty early innings, especially around the Source Atlantic acquisition given that that took place in Q3 of last year. And now that we have Jared in place, starting to see some realization there. That will happen more in the second half of the year than the first half of the year. Yes. Let me just add a couple of things. Zach, Thank you, Ron. Ron talked about at the beginning on [indiscernible] alluded to Lawson to kind of add color equities vertical or the Gexpert Services tried to both of us tried in our prepared remarks to indicate that book to bills and revenue certainly on the Jet Express services side and also in most of the categories certainly the capital [indiscernible] of test equity continued to show good strength. Like we enjoyed in the fourth quarter. March is an important month in the first quarter always.

So even though January and February are feeling relatively better, both from a year ago and the trend off the fourth quarter feels good.

That doesn't mean that we have seen in March yet. So we're always respectful that we're not through the quarter yet. Margins are key to us and March will will influence the final margins for the quarter Regardless of how well January and February might have felt. There's not a lot of areas that we are feeling are directionally softer which I think we called out military There's kind of a big question mark there in terms of when that revenue really starts flowing for us again. But the the rest of the key end market areas other than C and I feel like they're directionally heading the right direction. Mexico it's got some choppiness still to it.

We saw that in the first half of last year and it persisted during last year. For Hisco and but it's not going directionally, it's it's stable to improving. Since the middle of last year.

Great. Thanks for the color. I'll turn it back. Yes.

Your next question is from Kevin Steinke Barrington Research, I wanted to ask about fourth quarter organic revenue growth. [indiscernible] your earnings release, you noted in line with expectations, although On your previous conference call, you been talking about kind of a flattish outlook. So I was wondering if you felt like the organic sales trend was A bit of a positive surprise for you in the fourth quarter and yes, just relative to to the improvement in the end markets that you referenced Yes. I mean, [indiscernible] some specifics on this, but just to Kevin, I would say that we we were respectful going into the fourth quarter Certainly, how the fourth quarter can taper off. We've had some tough decembers in years past around purchasing behavior. And what we ended up with was a was a bit more firm Fourth quarter, that reflects kind of the way we feel about the first quarter. And that flowed through two of the those verticals at levels that were kind of above maybe where we had confidence to forecast or to kind of message the third quarter and that was obviously the Jesper Services vertical. Sustained momentum that it's sustaining, the momentum it's been enjoying.

And and more of its end markets are cooperating and are not cooperating right now. And those end markets are [indiscernible] lot more of the revenue there than the ones that are softer [indiscernible] Power and C and I or the two areas that we've got our eyes on. I do think that the we've got a meaningful power exposure there or set of relationships and a bull on electricity or power needs, I think many of us are. So that's super cycle, but we think we'll ultimately help us And we've got some renewed customer opportunities there. The Test and Measurement side of the business we saw indications, we spoke towards book to bill or order flow. Being positive, I think in the third quarter conference call there. But it's starting to translate into the dollars. More during the fourth quarter. We still have a few areas where we're we're working through filling orders, but But the revenue side of the equation there is starting to feel better. We've got a lot of operating leverage in both of those two business models. The acquisitions that we've done at JEXPERO Services, they're are really helping the total margin profile of the business.

That's part of our deliberate objective to add some specific capabilities that are higher value add that blend the margin profile of these businesses higher over time, but we've got to get the footprint right. Is why you've seen us do some things that may require us to [indiscernible] have areas like Source Atlantic, but we start off with a lower margin before we can kind of try and work it [indiscernible] that's I don't know if that's helpful or not. It definitely is. Yes, Thanks for all the additional color. I wanted to also ask about Lawson and the margin trajectory there. You noted that first quarter has started off pretty pretty well with Getting back to it, a double digit margin and a bit of more sales momentum there. Just as we think of the progression of margins for losses as we move throughout 2025, You said you were kind of past the near term pain and the the sales force initiatives, but at the same time, you also, I guess, will have some compression from ramping up that sales force and also the continued softer military sales on this trying to think about how all those factors play into the margin outlook for Lawson.

Really super fair in an area that Is it All of us are acutely focused on The law said in we got the benefit of some margin lift in 2023, I guess it was, As our compression started, but our sales momentum was still We're still enjoying good relative momentum there. And then the markets turned tougher Our government business turned a lot tougher last year. And we also had a lot less feet on the street selling for us as we went through the compression cycle what I tried to highlight in my prepared remarks is the significant amount of dollars that we committed to this sales force [indiscernible] significant investment in sales force resources we put into the Lawson team over the last eighteen months.

And so we knew that we were putting over $10,000,000 of back into the business. On the income statement. And then if you think about also the hiring, of capabilities or I mean hiring with more feet on the street [indiscernible] sellers for us typically cost about $5,000,000 in the first year that we've got so that was a real investment that we started staging through last year. And we were planning on or staging more of that through this year. So that number kind of straddles the year some. But we the benefit of it is that We are starting to see some better productivity and get some lift out of the first wave of sellers that we've hired And then the other challenge that Lawson's always had has been turnover. And we've been talking about this as long as long before I went on the Board of Lawson. The real cost of having over 20% of your sales force turnover every year which is the historic numbers, metrics are in excess of that for Lawson over the last decade. And so seeing that trend down over the last five months is something that should help the margin because it's been in our estimation, it's been an over $20,000,000 EBITDA kind of trying to manage through that that sales force turnover.

Many of the tools that we're adding and the capabilities that we've added have been to try and buffer that drag that you have when you do have turnover or to try and figure out how to shorten the the lead time before your sales force hits profitability or is productive for you. So that that J curve gets cut and then also try to make sure that our territories are more profitable on day one or at least scoped at a more attractive territory size. So all of those should add to we think, not only getting us back to the levels of profitability that we enjoyed when we were starting the compression and still having in market momentum. But to higher levels than that even which I've alluded to is our primary long term objective on Lawson, which is to get it up into the high teens and higher. We don't know we don't think that that's going to happen overnight, it's not a dramatic [indiscernible] We do think we'll see good progression there this year. But it's going to take a couple of years to really get that back to the levels that we enjoy probably in 2022 It also is going to take just end markets being more firm.

Ron, is there elements that I missed there?

No, I think you hit it, Brian, especially around the rep turnover. When we look at what we call impacted revenues, from the rep turnover, more of that we've seen some positive movement here, as Brian mentioned, over the last three to four months. In terms of those dollars being back in the where we were back in call it, 2022, 2023, when we started the compression, we did see a peak in again those impacted revenues that are connected to a sales rep continue to get progressively better throughout 2024 and then the last few months.

Has seen a marked improvement versus where we were in the last couple of years. So that plus being at call it nine twenty sales reps today our low point in 2024 was about about eight thirty at the end of the second quarter. So having 90 more individuals on the street now certainly help us in that ADS number, which as you know we can drop $0.3 to $0.4 of every incremental sales dialer into loss EBITDA line. So and then certainly building that out to 1,000 sales reps here by the second half of twenty twenty five. So still some investments to be made relative to the sales reps, but we're excited about a lot of the areas and a lot of the data that we're now receiving through our CRM tool and then also the rollout of our new website, which will take place here later yet here in the first quarter. And we think that those are are two areas that really can help the productivity of our reps.

Okay, great. That's helpful. I also wanted to ask about with regard to loss and you said there were some positive signs initially around the military orders, but now you're outlook is a little more subdued. How do you think about that? Is pinpoint, but yes. It's Any government spend anything tied to government spending, federal government spending, or the military specifically right now has been an enigma It was an enigma for me as they changed their ordering program, if you will, or the way that you had to be on there federal supply schedule last year and it some of the bunch of the kits that we like MRO kits that we put together for them for keeping equipment up and running. [indiscernible] those orders got held. And so so I just hope that all of our equipments are running out there. I'm more worried about military than I am worried about our about our revenue associated with it, although I guess I'm worried about both of them. We're hearing that those orders have been held. They went through a process. If you [indiscernible] And then we started to see and hear that those orders are going to be released.

And then there's been a more austere element of force in Washington. They're trying drive holding down spending. And so I don't know whether or not it's holding down or delaying at this point. But we're just being subdued in our expectation on when those dollars are going to get released to us. And so that could create some noiseiness It was a It's a big number when you look at our total revenue that was down in the fourth quarter or what's the drag that we had for all of last year that federal government spending line. We won some contracts last year on local and state. So we had some benefits that we expect to flow through this year. On organically growing our government business, but it's all at the local and state level. And then we had these federal relationships that were well over we're down well over 50%. I mean, I think our military was down 75% or something [indiscernible] The fourth quarter.

And so It's anybody's guess as to the timing of when that comes back. Our sales force that covers it has been or key people to our organization that have stayed steady on even though they've seen their book of business contract. We appreciate their commitment to their customers during this tough period of and for themselves on their own income from a commission perspective. So We're not hearing that we're losing that business. We're just hearing that it's stuck on somebody's desk and it's not being released. So I wish I had a better answer for you. We just kind of we modeled and forecasted our year without making bold assumptions around that at all. And so, we just felt like it was out of our control Is that fair? Absolutely.

Yes. Yes. It is Brian. It feels like we've been kind of whipsawed on this throughout the second half or maybe even the last the last three quarters of twenty twenty four where we thought we were going to see some of this come through. And then it seems like we get some positive news and then some news that things are going to continue to get held. So to Brian's point, we're just being just really it's hard to make a prediction as to when it's ultimately going to come through. Again, we feel good that the orders are still sitting in the queue. It's a matter of of when they'll be released. And just the mixed messaging that we've received over the latter half of twenty twenty four just makes us a little bit a little more conservative on trying to commit as to when they may come through in 2025. Okay.

Totally makes sense. Just lastly, I wanted to ask could you remind us about if you have a certain timeframe in mind for ramping Source Atlantix margins up to that double digit level? It's not fast enough.

We've got a great team in place. We're adding a couple more resources that we're really We appreciate that we had [indiscernible] Source Atlantic has a great organizational structure, some great employees, wonderful commercial leader We had have great people over at the Bolt Supply House. We're very We wanted to be mindful about how we brought those organizations together and not be too abrupt just given that they both had proud cultures [indiscernible] bringing two different Canadian organizations together on either side of of the country. And so we wanted to make sure that we had strong cultural buy in and strong cultural leadership there to try and bridge process. We have four facilities that are in the process of being four locations we're consolidating facilities. And so that is going to release some dollars. When we looked at Source Atlantic and worked through buying them, They had a fledgling Western Canadian operation that had a lot of expenses associated with it. And was losing quite a bit of money on the Western half, just as they were building it up. And so when we looked at our purchase price on Source Atlantic, It was largely working capital and real estate and then a very modest AirBall over real estate and working capital values.

And that modest 10% or right at 10 times multiple. But when we looked at the specific dollar loss that we could that we could reverse, by consolidating facilities in Western Canada It [indiscernible] significantly lifted their margins and it significantly it didn't get them all the way to 10%, but it it made a big dent to getting them there. And so we're in the process of doing that. It will happen I think, between now and the end of the second quarter. So it's going to take us two quarters to get through the consolidation piece. And then then we've got some work to do on how we manage [indiscernible] our margin structure there But all that and it's easier to do that a number of our customers operate up there in in pretty harsh weather environments this time of the year. And so it's easier to try and work through the volumes that we get There's a lot of more seasonality in that book of business than maybe we communicated well to The Street just because you get to mining types of mines and large infrastructure investments that are going on or large companies with significant infrastructure that's pretty far north, especially on that that Eastern Seaboard swath of Canada.

There's not a lot of activity during these winter months.

So fourth quarter and first quarter are seasonally soft months for Source Atlantic. [indiscernible] [indiscernible] dragged our margins in the fourth quarter. Down more than they would have been dragged down had they been One of the second or third quarter revenue months And obviously had some of that in January and February just in terms of total volume and throughput. But we're also now going to work on trying to get that margin to where it needs to be longer term. When you can take out expenses on a on a part of the business that was losing $6,000,000 or so of EBITDA and you can flip that to a positive Distribution. My team likes to call that pick six at the goal line.

So you're kind of swinging the points to your favor And so it can happen in a pretty good hurry.

But it's not going to happen here in the first three or or four or five months of the year. Okay. Thanks for all the insight. I'll turn it over.

Thank you.

Your next question for today is from Ken Newman with KeyBanc Capital Markets.

Good morning, Ted.

Hey, good morning guys. Thanks for squeezing me in.

Good morning, Ken here.

Appreciate you staying hanging in here.

Yes, no, of course. First one, Ron, I just wanted to go back to the Lawson comments you made about I'm just trying to understand whether holiday timing was a material impact there relative to those rebounds I think of your larger peers decided some extended customer shutdowns due to the timing of New Year's and Christmas. Was that something that kind of materially impacted the sequential move of ADS from December to January, And then I'm also wondering if just given the moving target on tariffs, if you're seeing customers pre buying inventory at all within that business? [indiscernible] So typically, just by way of history, we would normally see a lift going from December to January, specifically to to your point just around some of the holiday timing and so forth, And but I would say we saw a a much almost 2x that normalized lift this year going from going from December into into January and And when we look at our kind of the core piece of the business, In terms of what's coming through on the field sales rep side, we are seeing much better results even if I go back over many months. January was higher than December.

It was higher than November. It was higher than October all three months. And so and then February sequentially was was up over where January was at as well. So yes, I mean certainly the soft December played into that a little bit, although as Brian mentioned December is always a little bit of a wildcard, especially on the Lawson business.

But it feels like we've seen some nice movement up beyond what we would normally expect, both in January and in February. So I think that points to some positive signs.

Yes, go ahead, Brian. And one of the things that, Ken, that that I'm a lot more respectful of. I always have been respectful of this as a public shareholder in Lawson for years. I was very curious about the math associated with about hiring and spooling up the sales force. I mean, for years in the 2015 to 2018 period [indiscernible] '13 to 2017 period before I was over the wall. We talked about adding 50 sellers or 100 sellers on a net basis. At the end of the day, feet on the street matters. Our sales force, our outside sales force is the lifeblood in many ways of this certainly this business. [indiscernible] going compressing 200 sellers or 190 going from ten twenty down to eight thirty then now building back up. No matter what's going on in your end markets, with your customers, The most important thing on a comp store basis or comp sales basis is how many feet you've got out there and how many people making sales calls. You've got working for you. We have a massive amount of of customers that we have bins and cabinets with where we are not covering them the way that we should be.

Because we just we didn't have enough sales people as we were reorganizing territories and we were going through all these sales tools that we were adding to our capabilities for our sellers. To make them better. And so at the end of the day, the cost of that, if we had a tailwind with our customers, it would have been less noisy than it was. If we hadn't had the military spending or the federal government spending challenges last year, it would have been more opaque to the public shareholder investors.

But the reality of it is with a headwind in PPI and and with the government spending, what really is exposed here is the fact that we had 190 less sellers at one point than we'd had twelve or eighteen months before. And that's a massive drag to trying to drive revenue. Really proud of the team for having tackled what was a an initiative that we've been we started we were talking about it from the first day I went on the Board. About at what point in time are we going to really roll out all these tools how disruptive would it be to some of our sellers that were later in their careers and were closer to retirement, and trying to protect them and not have them have to worry about the tools, but making sure that we have the tools for those that we were hiring and that we were bringing on board so that they were better equipped to to drive revenue faster. And to have a better level of accountability of 90,000 inactive loss in bins and cabinets that we have out there in the field. And so, that's a lot of customers that that we have had very active relationships with that are that have our infrastructure that we floor plan for them That was another thing that was a massive surprise for me when I went on the board was how much money was buried in our cost of sales of us giving bins and cabinets away or floor planning them for customers to put our product in those bins and cabinets.

And you step back and you looked at whether or not you're covering them adequately with your outside sales force, we worked And so we are going to. And we're going to continue to We wanted to get it organized in a way that allowed our sellers that we're hiring to be more effective and efficient. With their time. And for us collectively with them to be able to have the tools to help them see where they needed to be and how they could make sure they did the best job possible for their customers. And there's a lot of customers out there that are asking us to with the infrastructure that we have on-site for them to do a better job. Now the customers that we're covering, we're covering well. It's not having to ask feet on the street and we're back building into that. And that's the primary driver to average daily sales. Without a doubt.

So just to be clear, Brian, you're not seeing any indication of customer pre buy? And the reason I ask obviously is while PMI is back above 50%, the new orders is back in contract right? So I'm just making sure that that's not exactly what we're seeing.

And Ron's got a great schedule. We've spent a lot of time looking at our our indirect and direct sourcing. For us, I don't think that we're seeing any indication based on the amount of revenue per invoice. And the And the in those categories that we that's not jumping off the page And for Lawson, we don't have a ton of product that we're sourcing in a way where you have some test and measurement equipment that's coming out of [indiscernible] Focused areas. But in total, it's $8,000,000 or $9,000,000 of indirect and direct impact that we would see across all of our categories and all of our verticals. That we could have tariff impact that tariff impact on. But that's going all the way deep most of that's indirect. Or much of it's indirect. Or it's large electronic goods that are coming out of China on the test and measurement side.

Ron, is there help me there? Yes, that's right, Brian. I got a question. [indiscernible] Yes, on the tariff side. So if we look kind of across DSG, on the direct import, and not that all of that would be impacted by the potential tariffs. It's about 12% of our overall purchases on the direct [indiscernible] On the indirect, it's a little tougher to get to an all in number just because of of the raw materials that are built into some of the products that we're purchasing and so forth.

But But I think when Brian mentioned this in his prepared remarks as well, If you look back over the last couple of years, relative to us being able to work closely with our customers so that we don't see margin deterioration. I think we've proven that we've been able to do that in the past. It's not again, it's not a huge number for us across DSG.

On the impacted countries where the tariffs have been put in place.

But I would say, I mean, we're starting to receive some letters from our vendors And we're starting to have some communication with some of our end customers as well already in terms of what that means. So we're not sitting idle around this. We'll get we'll be in front of it for sure. To make sure that we don't have any margin impact Dan, one of the the question you asked is a great one and it's what I would say is that on the MRO side, the order quantities that we get and how distributed our customer base is really feels more like adding an extra now almost 100 additional sellers is more impacting our ability to cover existing or kind of historic loss in customers again well with just having more feet on the street. So I don't see that as it's harder to see at that granular level given how many customers they are and how small they are. If you go over to test equity and the test and measurement side, and some of the products there that might be could have some risk around them with tariffs. Our book to bill or our order volumes that preceded our revenue volumes there where we were saying in the third quarter and early fourth quarter, we were starting to see more and more RFPs and we were getting more interest in order that all predated the election in November So we felt like that market was coming back and it the channel was cleaned up.

And that that market was coming back just out of the normal long the cycle that we've been through since kind of summer August of twenty twenty three, I think it was, maybe which one it started really deteriorating. But it was certainly not growing after late twenty twenty two. And so that cycle started working back in our favor long before there was an election. Conversation around tariffs. So what we're seeing on order flow there is is really coming out of the RFPs and and the indications that we had customers that were going to be buying from us.

It [indiscernible] The end markets there the book to bill started building throughout last year on each of those end markets that have been strong. And the book to bill is continuing to stay consistent with the with across most all of their end markets, consistent meaning if it's a 105 all the way up to 140 or 160, [indiscernible] Or revenue that's flowing through. It's the C And I And It's Hungary and it's a little bit in PowerGen and where we've seen some softness or some choppiness there between where book to bill is currently and where revenues have been trending. And But things there seem really consistent with activity at the plant level they're having product pulled through. I don't know and they don't have a lot of if I remember, Ron, I'm looking at our schedule, I think they're the least impacted by [indiscernible] On their country of origin products [indiscernible] Yes. That's helpful.

Maybe one quick question you asked Ken, the question you asked is going to be one that I'll be torturing myself with because what I we're not hearing, I'm not hearing it. But the fact that I'm not hearing it or we're not talking about it, we're talking about tariffs and we're talking about how it could impact us, But our customers, it's not getting back to our level that customers are pre buy. But I'm going to go back and try and ask at the field level and the regional level see if I can get more insights on whether or not there's something at the street level that I'm not hearing. [indiscernible] One quick one to close this out, just [indiscernible] The Canadian double digit margin target run rate by the end of this year. What's the risk that tariffs limits your ability to get the revenue synergies there that you need to get to that target? Well, So most of that target to get to that target is going to be [indiscernible] fixing their cost structure on the West in Western Canada. And these consolidating facilities and kind of designing or kind of executing on a design that we put in place during underwriting to make it one really strong Canadian company.

So that's that's largely driven around the Canadian business the cost structure of that Canadian business. And trying to line it up. There were some revenue objectives there, but a lot of their customers are are not as much tied to that Ontario in Quebec, revenue that goes back and forth across the border. It's really the the business that we have at this point is an Atlantic Seaboard business that has a lot of product flowing north and mines, or along that coastline and has trade that's going Maybe more [indiscernible] Then it's the Calgary and West Western footprint a little bit in Saskatchewan kind of the the northern provinces, and kind of the middle part of the country, So I don't have I don't know how much of it is flowing back this direction. Where it's going to be impacted. And I don't know what don't have a lot of product that's flowing back and forth across the border at this point that I know of. I know that there's Our BMI business that we've had with the Kent and automotive and the loss in business, part of the reason why we wanted to make sure we had a stronger Canadian presence was that we wanted to make sure that we built a Canadian business that also gave us more productivity benefits out of our sales channel than we've had sitting on Lawson's P and L. Which is the Kent and Lawson VMI sellers.

And they would be the ones that maybe are could be more impacted by product that we are traditionally thinking about and Ron would can tell me whether how much of that product is moving out of Macook. From Macook to to a salesperson that's a BMI seller for Kent or Lawson Phil and Ben and [indiscernible] but it's not the source Atlantic and Bolt operations that I would feel like are most addressed there. Yes, that's right. Got it. Very helpful. Thanks. Yes. Thank you for the questions. Everybody's good questions. Thank you.

We have reached Brian for closing remarks.

Thank you, operator. Thank you everyone for engaging with us today. We appreciate your interest in DSG. We are excited about being aligned with you as shareholders. And we look forward to speaking with you again when we report our first quarter results in a couple of months. Thank you for your time. Have a great day and God bless.

This concludes today's conference. [indiscernible] [indiscernible]